Today's Convenience Store - State Store Count Data - Evolution of the Industry - Industry Resources

The Industry:  Evolution of the Industry

Prepared by the National Association of Convenience Stores (NACS)

Convenience stores evolved from a variety of sources early in the twentieth century. They drew upon characteristics of many types of retail establishments in existence at the time: the "mom-and-pop" neighborhood grocery store, the "ice-house" (from pre-refrigerator days), the dairy store, the supermarket and the delicatessen.

The Southland Ice Company is credited with the birth of the convenience store in May 1927 on the corner of 12th and Edgefield Streets in the Oak Cliff section of Dallas, Texas. "Uncle Johnny" Jefferson Green, who ran the Southland Ice Dock in Oak Cliff, realized that customers sometimes needed to buy things such as bread, milk and eggs after the local grocery stores were closed. Unlike the local grocery stores, his store was already open 16 hours a day, seven days a week; so, he decided to stock a few of those staple items. The idea turned out to be very convenient for customers.

Joseph C. Thompson, one of the founders and later president and chairman of The Southland Corporation, recognized the potential of Uncle Johnny's idea and began selling the product line at the other ice dock locations of The Southland Company. Further, these stores were open from 7 a.m. to 11 p.m., seven days a week.

In addition to convenience store development at The Southland Ice Company, other types of stores were emerging. There were "midget" stores in the 1920s and "motorterias" or mobile convenience stores. "Bantams" and "drive-in" markets were also around in 1929 where motorists never had to get out of their cars. "Delmat" vending machine type of stores were also popular for obtaining milk, eggs, produce and fresh meat. Dairy cooperatives often ran "dairy stores" or "jug stores" as outlets for their operations. Sometimes supermarkets had small outlets in rural areas for people who did not travel to the city enough for eggs, milk, etc.

The pattern of the emerging "convenience" types of stores grew modestly until World War II (although they were not yet called "convenience stores"). The big factor in all of these operations was fast service. The stores were most successful in warmer climates where the open front was a big attraction.

The end of the war and the increased ownership of automobiles sparked the rapid growth of the industry in the 1950s. The automobile helped fuel the growth of suburban living--of families wanting the "American Dream." Americans, with bigger cars and better roads, began flocking to the suburbs where they found plenty of space to live and raise children... but too much space between shopping centers.

The industry grew rapidly along with this consumer need for convenient shopping and supplanted the neighborhood grocery stores and became established in new suburbs and areas too small to warrant a supermarket. Once again, convenience store companies were opportunistic and innovative, thriving in market niches too small for others to operate profitably.
Additional forces continued to drive convenience store growth. The growth of the supermarket industry affected convenience stores. As grocery stores became larger and larger, they became less convenient for the customer who was in a hurry. Convenience stores filled in. Suburban families often had two cars and two incomes; both spouses working meant more discretionary income and less time for using a supermarket. Also, the increase in the number of working women reduced the amount of time available for shopping.

Stores were conveniently located. Customers could park in front of stores and could even leave children in the car and keep an eye on them. With the variety of items available, it was virtually one-stop shopping without waiting in line. Stores were easily franchised since it was getting expensive to start up a new store. They entered the northern regions of the country and continued to grow through merger, acquisition and new building.

Convenience stores continued to evolve from characteristics of the competitors: supermarkets, mom-and-pop grocery stores, specialty food shops, drug and variety stores, vending fast food chains, and gasoline service stations. Convenience stores began offering gasoline when self-serve became popular. The number of gasoline stations declined while the number of convenience stores selling gasoline increased.

Today, the main competitors convenience stores face are those mentioned above as well as chain drug stores, superettes, warehouse stores, general retail stores, home delivery services and, of course, other convenience stores.

Convenience Stores in the Last Twenty Years

In the early 1970s, convenience store operators had to cope with price and wage controls, gasoline and merchandise shortages, record inflation and interest rates, and increased competition due to longer hours and increased discounting by supermarkets. The energy crisis limited the quantity of gasoline convenience stores could sell. During the severe phases of the energy crisis, operators could sell all the gas they could get at the highest prices permissible under the price controls in effect at the time. The major factor limiting gasoline profits was an adequate source of supply.
The industry stood up to all types of competition successfully. As the size of supermarkets continued to increase to the new super store concept of 30,000 to 50,000 square feet, a number of the smaller, existing supermarkets fell by the wayside. The result was that many operators seized upon the pockets of opportunity provided by these openings.
More states began allowing self-service gasoline, so the number of convenience store gasoline outlets grew. More stores were selling gasoline and moving to owning gasoline equipment as opposed to operating on a commission basis (a higher margin per gallon was associated with a store owning its equipment).

Costs continued to go up with energy taking a sharp jump; severe competition held back margins; high interest rates affected bottom lines; more regulations were imposed by federal, state and local governments; and there was, in general, an increased cost of doing business. Store labor costs were increasing due to increases in the minimum wage and more fringe benefits as well as many other factors such as adding service items like gasoline, deli and prepared foods. The operators needed to attract and hold customers on a daily basis; Sunday openings were increasing. Marginal stores and marginal items were rooted out.

By 1976, stores selling gasoline were profitable and the numbers were growing. There was a competitive battle in gasoline as seen by the number of stores offering gasoline--the average margin dropped while the average gallons went up. As the major oil companies withdrew from certain locations, convenience stores were becoming a more and more significant source of petroleum product sales.

As the number of convenience stores increased, the average number of households served by an individual store dropped. The higher level of saturation and increased competition led to fewer customers per store; therefore, stores remodeled and refixtured to attract more customers rather than building new stores. Utility costs were high, but most stores continued to stay open 24 hours more often than not.

As the rate of inflation accelerated in the late 1970s, significant sales increases were necessary to maintain the trend of real growth in the industry. The growth in the number of customer visits outpaced the growth in number of stores. This trend reflected the frequency of fast food sales including sandwiches, coffee, and frozen novelties.

The convenience store industry continued to grow; but the impact of increased competition, higher energy costs, new store expenses, and higher labor expenses reduced profits as a percentage of sales. The increase in labor as a percentage of sales absorbed the improved gross margin and emphasized the continued need for employee productivity both in the store and at the staff level.
By the end of the 1970s, sales gains were realized due to inflation, gasoline, new stores and increased real volume per store. Store closings were attributed to older physical plants, changing location patterns, and higher breakeven points due to the rise in new store investment and the increasing capital requirements in areas such as fast food equipment.

Over 80 percent of the stores constructed were equipped with the ability to sell gasoline. The increasing volume per store, coupled with the growing number of stores with gasoline, increased the importance of convenience stores as a marketer of petroleum products. The smaller chains reported having significantly higher sales per customer which would be expected since several were superette operations, located in smaller towns with less customer traffic and, often as not, heavily promoting fast food and coffee sales. The larger chains were volume oriented. The two patterns presented opportunities for different merchandising strategies since the large chains were merchandising for increased transaction value while the smaller chains sought to increase the number of transactions.

Operators were making the stores more capital and labor intensive with the addition of microwaves, fountain drinks, and fryers as they expanded into higher margin product lines. The increased gross margin dollars generated by these products were weighed carefully against the associated incremental capital and labor costs. The trend toward 24-hour operation reflected the need to maximize utilization of the facility. As the industry moved into more fast foods, the equipment required a high level of maintenance and servicing. Servicing and cleaning equipment can result in a third-shift person whether the store is open or not.

In 1980, the slowdown in the number of new stores was inflation related. There was less money available, interest rates remained high, and stores required increased capital investment. Faced with a slowing economy, higher breakeven points made it even more difficult to justify opening new units. Instead, many operators were investing in remodeling existing locations to take advantage of lower rental rates.

Higher rental rates reflected the increased dollar investment in both land and building. These higher land and building investments reflected the high interest rates and inflation premium demanded by investors. A sizable portion of the industry's profit was derived from bargain rents on existing stores.

In 1981, economic recession and high interest rates dampened growth. High interest rates, high rental costs, heavy initial capital requirements and the general sluggishness of the economy all resulted in higher breakeven points and a continuing trend toward remodeling existing convenience store locations rather than committing funds to the opening of new outlets. By mid-1982, the economy was experiencing the worst recession since World War II. Oil supplies were in excess of demand and reduced prices and profits resulted throughout the oil/gasoline industry.

In food retailing, super warehouse stores doing over one million dollars per week in sales were shaking up the grocery industry. Retail gasoline, grocery, and fast food chains were seeing an increased activity in mergers and acquisitions and redeployment of assets.
As economic recovery progressed, gasoline usage increased but remained below the levels of the 1970s. Sales in gasoline service stations fell due to falling prices and demand that had not kept up with supply in recent years. Food retailers continued to struggle with the influx of new store formats--super warehouse stores, gourmet stores, super convenience stores, hypermarkets, fast food restaurants inside convenience stores, gasoline pumpers with small convenience stores and more.

In the late 1980s, industry attention moved to improve operations, margins and cost control. Merchandising became the key ingredient for the successful operation of convenience stores. Merchandising programs have the two-fold objective of increasing store traffic and increasing the average sale per customer.

There was a continued reduction in the opening of new stores and an increase in the investment required for a new store. Acquisitions increased as a way for companies to increase store growth. The increase in the cost of land for the new rural store reflected the saturation of the urban market. Nevertheless, companies continued to look to the rural market for store growth as land and building costs were less costly compared to those in urban locations. The increases in the cost of both land and store construction reflected the competitiveness for the prime location. Annual sales for new stores needed to exceed the averages for existing stores by a sizable amount to ensure the recovery of the investment.

Operating costs continued to rise even faster than selling prices. Corporate acquisitions and mergers reached the highest level of activity in over 50 years. Sky-high insurance costs, underground storage tank liabilities and consumer group pressures regarding alcohol beverages and adult magazines became important factors. Increased competition, the changing labor force, and the uncertain opportunities presented by new technology all affected the industry.
Labor was becoming the largest operating expense component and represented a large factor in the reduction in the percentage of pretax profit. Regional differences in labor markets became especially acute as the convenience store industry increased services offered and stayed open for extended hours. Some stores turned to increased automation--Electronic Funds Transfer, Automated Teller Machines, and Scanning.

Beginning in the 1990s, several factors, such as the Gulf war, a recessionary economic climate and increased awareness of the environment, began to impact the industry. New Environmental Protection Agency underground storage tank regulations also started to make it more costly to operate a convenience store. In addition, industry concerns, such as inventory shrinkage, employee shortages and turnover, operating regulations and an aging population have made it important to reexamine the concept of convenience and the strategies for operating in an increasingly competitive environment.

Responding to the more difficult economic environment, companies beginning in 1992 lowered general and administrative expenses and closed marginal stores. Coupled with lower interest costs, higher gasoline volumes, higher gasoline margins, increased merchandise sales per store, and a strong customer focus, industry profits grew through the 1990s.

Stiff competition from other channel competitors, unpredictable gasoline margins, and the rapidly changing technology area are providing new challenges and opportunities for the industry. Those companies that seek out customer needs and align themselves to serve those needs will be successful in the future.

For more information on the current state of the convenience store industry and future opportunities, please contact the National Association of Convenience Stores at (703) 684-3600 and request the NACS State of the Industry report and the NACS 2005 Future Study.

Home - About NYACS - Trade Show - The Industry - Membership - Contact Us - Issues - Tools